Looks like a hedge fund to me

Pacific Overtures
James Grant 11.12.07, 12:00 AM ET

Great Quarter, guys!" I chirped, doing my best impression of a brokerage house analyst on a conference call, "and great 6 months and great trailing 12 months." The recipient of the flowery well wishes--for once, well deserved--was David J. Winters, founder and portfolio manager of the Wintergreen Fund.

Winters and his fund starred on this page a year ago. He was 44, his fund only one. Here was a strange turn of events, I observed: An established, moneymaking mutual fund investor had quit a big money management company, Franklin Mutual Advisers, to roll his own. His own mutual fund, that is. You'd have thought Winters would start a hedge fund.

Certainly he's got the investment record a hotshot from Greenwich, Conn. would envy: up an annualized 22.7% since inception, versus 15.9% for the S&P 500. The secret of his success? Finding terrific companies selling for less than they're worth. Simplicity itself.

Actually Winters could make things as complicated as he chooses. His remit is the world. No restrictions in his charter on where or how to invest. He can buy common stocks or sell them short; he can invest in distressed securities, foreign currencies or restricted securities. Think of your investment, he encouraged his shareholders in the first Wintergreen annual report, as "the antithesis of an index fund." Unhampered and unpigeonholed, he added, the fund can be "agnostic with respect to geography, market capitalization, sector and security type."

Winters is, in most ways, the archetypical "Yes, but" investor. He walks in the way of Graham and Dodd. He does his own thinking. And he's deeply cynical about Wall Street. Yet he's as cheery as a growth-stock investor when the Nasdaq is flying. "We're delighted with the way things have gone," he says, "and we think there are tremendous opportunities out there."

He mentions a long-established and faraway conglomerate, Swire Pacific Ltd. "It's family controlled," Winters relates. "It's essentially a Scottish conglomerate that's Hong Kong-based. We think it trades, give or take, at a 35% discount to net asset value. They've been consistent buyers of their own stock. The NAV grows, give or take, 10% to 15% [a year] over time. And they're really not promotional at all. They make no effort to encourage people to be enthusiastic owners of their stock, which we like."

Swire is Hong Kong-listed, and so is Shun Tak, which owns and develops real estate in Macau, the world's number one gambling destination--that is, not counting the Shanghai stock market. Of course, says Winters, not only are they not making any more real estate in Macau, they're also not reclaiming much. He estimates that Shun Tak, which has interests in hotels, ferry transport and investment securities, is quoted at a 20% discount to its net asset value and "it could be much bigger."

Members of the value-investing tribe generally steer clear of China, seeing that the mainland equities markets are bubbling as if it were 1999 again. Winters understands the argument but likens himself to the conservative merchants who sold jeans and shovels to the prospectors in California during the 1849 gold rush. "A lot of our companies capitalize on what's going on [in China]," he says, "but are undervalued as opposed to trading at 100 times earnings."

Winters admits to lighting up a cigar now and then, though not to chewing, dipping or cigarette-smoking. So it's not because he uses their products that he's built substantial positions for his fund in the makers and marketers of cigarettes: Japan Tobacco, Imperial Tobacco Group , Reynolds American and Altria. Tobacco companies can raise their prices and make the increases stick. How many other businesses can do the same?

A year ago Wintergreen fund held 25% of its assets in cash. Who knows? Winters then reflected. "We're just always waiting for that big, slow pitch in our zone," he said. In the July-August credit fright, says Winters now, he did swing, repeatedly. But the the beaten-down banks, brokers and mortgage lenders did not tempt him (indeed, HSBC, one of Winters' former favorites, got the heave-ho last spring).

His 2006 annual report closed with an expression of worry about excessive corporate leverage and a corresponding expression of hope for "a return of the bankruptcy cycle and opportunities to participate in the resulting restructurings." That time has not yet come, Winters observes today; too much money is chasing too few orphaned bonds. But, he adds cheerfully, better days--or rather, in this context, worse days--surely lie ahead.